Current health of the power sector necessitated an “immediate need to infuse liquidity” in them: Govt.
New Delhi, August 22: Headed by Prime Minister Narendra Modi, the federal cabinet panel on economic affairs yesterday approved the relaxation of borrowing limits for cash-strapped electricity distributors, a move which could also help distributors clear debts owed to generating companies, which are predominantly coal-based, with more than 70% of India’s electricity generation fuelled by coal.
With the pandemic and its associated nationwide lockdown exacerbating liquidity problems for the power sector, this move underscores continued efforts by Delhi to support distributors, who are a key but weak link in the electricity supply chain to consumers. The latest development coming after the government implemented a temporary moratorium on payments to power producers along with announcing a ₹900bn ($12bn) financial package for the sector earlier this year.
Even though power supplies, being an essential service, were maintained during the lockdown, the consumers have not paid bills in a timely manner, leading to a slump in distribution companies’ revenues as electricity demand dropped. With power demand expected to remain soft in the coming months given the subdued prospects of any rapid recovery in economic and industrial activity, weighing further on the health of distributors, the government added that it necessitated an “immediate need to infuse liquidity” in the sector for uninterrupted power supplies.
Consequently, state-controlled power sector lenders Power Finance and Rural Electrification would extend loans to distributors for working capital needs beyond the existing cap of 25% of the previous year’s revenue. As a matter of fact, most distribution companies in India are state controlled. Statistically, the total debts to be paid by distributors to power generating firms amounted to ₹1.19 trillion at the end of June, weighing on power producers’ cash flow while also having a trickle-down effect on coal mining as utilities’ total outstanding debts to state-controlled coal producer Coal India (CIL) rose to ₹205.71 billion as of the end of July from ₹143.74 billion at the end of March.
The financial health of the sector has weakened over the years as distributors borrowed heavily from state-run financial institutions to pay the power utilities and meet other working capital needs, given their inability to raise power tariffs regularly to cover their costs. Hence, as part of its broader goal to revive distribution companies, Delhi has proposed amending the prevailing national electricity law. An amendment to the law seeks regular tariff revisions by distributors, the installation of smart meters and setting up an authority to ensure honouring of power purchase contracts with generating companies.
The distribution companies’ revival is crucial to the government’s overall goal to reform the power sector and also support its plans for growth of the domestic coal sector. With a broader aim of cutting imports, the country aims to boost domestic coal output by encouraging private-sector participation along with supporting rapid growth in CIL’s production. India’s thermal coal imports are likely to shrink this year after holding steady in recent years. Coal imports in July fell for the fifth straight month on a year-on-year basis with weaker coal-fired generation and ample supplies of domestic coal.
